Soho House’s private party may prove disappointing
02/04/2024 09:46
(The author is a Reuters Breakingviews columnist. The opinions
expressed are her own.)
By Karen Kwok
LONDON, April 2 (Reuters Breakingviews) - Ron Burkle
reckons Soho House SHCO.N is a fundamentally profitable
business, if only investors could look at it in the right way.
The company’s executive chairman might in theory have a point,
but only if the group’s newer private members’ clubs become as
popular as the older ones.
The equity value of the $1.1 billion London-based group has
more than halved since its 2021 New York listing. A recent
short-seller report hasn’t helped. Billionaire investor Burkle,
who bought a controlling stake in 2012, last month said that the
public market misunderstands the business. He could potentially
support a take-private with the help of outside money. Board
members and their affiliates own about 75% of the stock, and
would keep control.
At first glance, Burkle’s profitability argument seems odd
given Soho House’s consistent historic losses. His point,
however, is that the red ink is down to growth. Soho House now
has 43 clubs in 18 countries, compared with just 11 in four
countries a decade ago. Newer additions, like Mexico City,
seldom make a meaningful profit until they’ve been up and
running for a few years.
Eventually, once the number of fee-paying members rises and
the restaurants fill up, the money flows. The so-called
“house-level contribution margin”, effectively the gross profit
margin for an individual club, averages 35% for sites that are
five or more years old, according to Burkle. Many of the most
established clubs are well above that level.
It’s possible to imagine what the income statement might
look like if all the new locations become as profitable as the
mature ones, like the original London Greek Street site. The
overall gross margin for the global chain of members’ clubs
might then be in the region of 40%. Analysts reckon that, in
2026, Soho House’s general and administrative expenses and
depreciation and amortisation could together swallow up roughly
20% of total revenue. Deduct those costs from the gross profit,
and the group’s network of private clubs might be able to turn
something like 20% of overall sales into operating profit, if
all goes to plan.
That’s a big “if”. This scenario effectively asks Burkle’s
would-be buyout partners to believe that Soho Houses in Bangkok,
São Paulo, Manchester, Nashville, Portland and Stockholm will be
as busy and profitable as the most established clubs. There’s no
obvious reason why that should be the case. The newer cities are
often less wealthy than London or New York, and tend to be
places where Soho House has less cultural cachet. If the global
sprawl ends up contributing little to the wider group’s
earnings, the hoped-for profit might never materialise. Any
backers of a Burkle-blessed buyout may then wish they’d never
come to the party.
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CONTEXT NEWS
CC Capital, the investment firm led by former Blackstone
executive Chinh Chu, is one of the suitors in talks to take
members’ club operator Soho House private, Reuters reported on
March 18 citing people familiar with the matter.
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Graphic: Soho House’s market value since IPO in July 2021 https://reut.rs/4cyvlmU
Graphic: Number and age of Soho House private clubs worldwide
https://reut.rs/3vwluxq
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(Editing by Liam Proud and Oliver Taslic)
((For previous columns by the author, Reuters customers can
click on KWOK/
karen.kwok@thomsonreuters.com; Reuters Messaging:
karen.kwok.thomsonreuters.com@reuters.net))